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The Legacy of LIBOR - Seongwook Nam

London Interbank Offered Rate (LIBOR) was akin to the holy scripture which global financial transaction makers referred to for nearly three decades. LIBOR was a deceptively simple solution to a challenging problem faced by the syndicated loan market. The lenders had no set benchmark for interest rates when offering or taking up loans and thus did not know of an appropriate rate to charge or expect. To resolve this, the banks formulated a standardised rate calculated using the interest rates which the banks would offer to other banks when providing short term loans, and taking a trimmed average of the figures. This laissez-faire approach was formalised as LIBOR in 1986 when the British Bankers Association took on the responsibility of calculating the rate daily. LIBOR became an indispensable tool not only for loans but for other financial instruments, most notably derivative contracts.

While LIBOR was actively utilised around the world, its conceptual flaw revealed how precarious this dependence was. The rate was susceptible to artificial manipulation by banks that had plenty to gain by setting a low LIBOR rate which they used in their transactions. As succinctly phrased by The Guardian, “[LIBOR] relied on banks to tell the truth but encouraged them to lie”. This practice was eventually revealed in 2008, in the backdrop of an unprecedented financial crisis, when the Wall Street Journal reported that the world’s largest banks had distorted LIBOR to deal with the problem of a liquidity crunch. The finding launched a series of regulatory crackdowns on various banks and financial institutions, resulting in a plethora of legal disputes.

On the 5th of March 2021, the Financial Conduct Authority (FCA) announced that LIBOR will be phased out in the coming years, with a major milestone being 31st December 2021 when LIBOR one-week and two-month USD LIBOR rates publication will be ceased. In light of this news, this article will explore the legacy it left on the development of the tort law concept of misrepresentation by analysing a recent case involving LIBOR.

The case under question is Boyse (International) Ltd v NatWest Markets plc and another [2021] EWHC 1387 (Ch). The case involved Boyse, a company holding property investments, suffering financial damage estimated at £8 million after purchasing LIBOR referencing derivatives from NatWest Markets and Royal Bank of Scotland (the Banks) in 2007 and 2008. In late 2012, after the claimants realised the financial damage, they had begun to hear about the Banks’ inappropriate conduct in manipulating the LIBOR rates through press updates. The rumours were found to be official in February 2013, when the Financial Services Authority issued a ‘Final Notice’ to the Banks, detailing their misconduct as well as an imposition of a fine.

The Court proceedings were brought onto the Banks in 2019, with Boyse claiming damages from the Banks on three grounds:

1. ‘The LIBOR misrepresentation claim, which was a claim in deceit to the effect that the Bank made implied misrepresentations in respect of the setting of the LIBOR benchmark, upon which Boyse relied when entering into the IRHPs [Interest Rate Hedging Products, LIBOR referencing derivatives];

2. A claim that the Bank's manipulation of LIBOR constituted a breach of certain implied contractual terms;

3. A claim in deceit to the effect that the Bank made implied misrepresentations in respect of the suitability of the IRHPs for Boyse upon which Boyse relied when entering into the IRHPs.’

Boyse’s strongest legal argument which claimed that the Banks had misrepresented the process of which the LIBOR rates were set was, however, met with a challenge. The Banks claimed that actions founded in tort expire six years after the cause of action is accrued under s (2) and 32 (1) of the Limitation Act 1980, which states:

'the action is for relief from the consequences of a mistake; the period of limitation shall not begin to run until the plaintiff has discovered the fraud, concealment or mistake (as the case may be) or could with reasonable diligence have discovered it.'

The Banks argued that in the case of the claimants, their bringing of actions against the Banks in 2019 had meant that they were time-barred as they should have discovered the fraud, concealment or mistake in February 2013 or possibly even prior to that through press findings with reasonable diligence.

The Court ruled in favour of the Banks, as Trower J concurred with the Banks in that a reasonably diligent person would have discovered the mistake in 2013, resulting in Boyse being time-barred from seeking action. The Boyse case lucidly shows the high standard of reasonable diligence demanded by the courts in matters involving a relatively complex financial instrument such as LIBOR. The lesson to be learnt is that close attention is required towards large-scale industry incidents, despite the technical barrier, for stakeholders if they wish to bring civil action to claim compensation.

While LIBOR is set to fade into the history books, numerous LIBOR related disputes are expected to be decided by English courts and similarly in other jurisdictions for the time to come. Due to its widespread usage in the financial markets, the cases will stimulate a chain of ripe uncertainties in application of tort law and contract law. Unexpectedly, the concept of LIBOR may remain etched in the legal texts and the minds of lawyers for a longer period while the rest of the world releases the troubled creation into the landscape of the past.

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